Climate Change: Plugging the Growing Risk Gap in the Technology, Media and Communications Industry

Climate Change: Plugging the Growing Risk Gap in the Technology, Media and Communications Industry
October 26, 2023 18 mins

Climate Change: Plugging the Growing Risk Gap in the Technology, Media and Communications Industry

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Technology, media and communications businesses need to understand how climate change threatens their operational resilience. Parametric insurance is becoming an important part of the solution.

Key Takeaways
  1. Only 42 percent of global losses relating to weather and climate were insured in 2022.
  2. Most businesses know they are exposed to climate change risks, but the quantum of exposure is harder to grasp.
  3. It’s about matching capital to risk with parametric solutions that balance risk transfer and risk retention, alongside alternative methods of risk transfer.

In 2022, economic losses totaling US$313 billion were recorded worldwide as a result of weather and climate events, but only 42 percent of that was covered by insurance. This highlights a growing gap between economic loss and these type of insured losses.

That insurance gap is likely to grow as the effects of climate change continue to accelerate. Businesses within the technology, media and communications (TMC) sector face the challenge of understanding how climate change affects the risks they retain and transfer — via insurance, for example — and how those risks will impact their bottom line.

Adopting an effective risk framework to assess, quantify and manage risks related to climate change will be critical to operational resilience. While traditional insurance risk transfer will continue to play an important role, deficiencies in cover mean that TMC businesses will need to consider alternative solutions like parametric insurance to deliver the protection they require.

Climate Losses Mount

In 2022, at least five weather and climate events topped economic losses of more than US$10 billion. From Hurricane Ian’s impact on the US and Cuba, to European and US droughts, to floods in Pakistan and China, it was the third year in a row that global insured losses surpassed US$100 billion.

Successfully managing this risk begins with understanding how losses related to climate change translate at an individual business level.

Assessing Climate Change Impact

Every TMC business needs to know how risks related to climate change can impact its operations — whether the peril is flooding, windstorm or wildfire, for example — and how those risks are changing in different geographies. It’s also critical for climate risk modeling to extend beyond an organization’s own operations to its supply chain.

This assessment piece of the operational resilience framework can map out the risks. It then falls to the quantification phase to put some figures to the financial implications of climate change.

Quantifying the Climate Change Cost

Most businesses know they are exposed to climate change. In many cases, there is a growing regulatory reporting requirement, such as the Task Force on Climate-related Financial Disclosures (TCFD) or the EU’s Corporate Sustainability Reporting Directive (CSRD).

But the challenge is in understanding the quantum of that exposure. How often is a particular weather event going to happen, and how much will it cost the business?

This is where advanced analytics play a key role. Aon’s Climate Risk Consulting helps businesses understand their exposure across the next 10 to 20 years, whether it’s related to hurricanes in Florida or flood risks in Europe.

It’s important to note that climate change is not just physical risk either. There is also transition risk in areas like regulatory policy and reputation. Understanding and measuring how these risks could impact a business is equally critical.

Following the assessment and identification phases, effectively managing the risk demands innovation beyond traditional insurance methods of risk transfer, which can take a long period to pay out and might not cover an organization’s entire losses.

What if a Category 5 hurricane destroys a TMC business’s manufacturing buildings — for which it is fully insured — but access roads and distribution channels are affected? Or key suppliers are unable to operate? These are the non-damage business interruption costs that are often overlooked and left exposed.

Parametric benefits include:
  • Certainty – payment can be made once the trigger conditions are met, regardless of whether actual loss is incurred. No loss adjusting is needed.
  • Fast payment – removes financial uncertainty and helps protect the balance sheet.
  • Availability of cover – protection for risks not available from the traditional insurance market.

42%

Only 42 percent of global losses relating to weather and climate were insured in 2022

Source: Weather, Climate and Catastrophe Insight

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Addressing Market Deficiencies

For most organizations using parametric solutions, the turning point was the inability to get the necessary insurance limit for a peril and geography due to a lack of market capacity, high pricing or attachment point – market deficiencies that parametric insurance addresses.

While these solutions have been around for many years in the utility sector, for example, it was only in the last decade that corporates began turning to parametric solutions – usually as a complementary wraparound for their more traditional indemnity cover.

Matching Capital to Risk

Ultimately, it’s about matching capital to risk with parametric solutions that balance traditional risk transfer and risk retention, alongside other approaches such as catastrophe bonds and captives. Increasingly serving as viable options for smaller, mid-market-sized TMC organizations, these alternate risk transfer methods can help TMC businesses manage their growing climate risk more effectively, thus helping them improve their operational resilience today and into the future.

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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